Accounting Archive: Questions from April 14, 2013

Classic Chef Appliance Company manufactures home kitchen
appliances. The manufacturing process includes stamping, final
assembly, testing, and shipping. In the stamping operation, a
number of individuals are responsible for stamping the steel outer
surface of the appliance. The stamping operation is set up prior to
each run. A run of 60 stampings is completed after each setup. A
setup requires 40 minutes. The parts wait for the setup to be
completed before stamping begins. Each stamping requires 6 minutes
of operating time. After each batch is completed, the operator
moves the stamped covers to the final assembly area. This move
takes 10 minutes to complete.

The final assembly for each appliance unit requires 20 minutes and
is also done in batches of 60 appliance units. The batch of 60
appliance units is moved into the test building, which is across
the street. The move takes 25 minutes. In the final test, the
60-unit batch is tested one at a time. Each test requires 6
minutes. The completed units are sent to shipping for packaging and
final shipment to customers. A complete batch of 60 units is sent
from final assembly to shipping. The Shipping Department is located
next to final assembly. Thus, there is no move time between these
two operations. Packaging and shipment labeling requires 12 minutes
per unit.

Instructions:

1. Determine the amount of value-added and
non-value-added lead time and the
value-added ratio in this
process for an average kitchen appliance in a batch of 60
units. Round percentages to one decimal place. Categorize the
non-value-added time into wait and move time.

Value-added minutes

min

Non-value-added minutes:

Wait time minutes

min

Move time minutes

min

Total non-value-added time

min

Total lead time

min

Value-added ratio (as a percent)

%

2. How could this process be improved so as to
reduce the amount of waste in the process?

For the year, Connect Tek Inc. budgeted the following costs for the
cellular phone production cell:

Connect Tek plans 2,100 hours of production for the cellular phone
cell for the year. The materials cost is $54 per unit. Each
assembly requires 18 minutes of cell assembly time. There was no
March 1 inventory for either
Raw and In Process Inventory or Finished Goods Inventory.

The following summary events took place in the cellular phone cell
during March:

Healthmark Medical Inc. wishes to determine its product costs.
Healthmark offers a variety of medical procedures (operations) that
are considered its "products." The overhead has been separated into
three major activities. The annual estimated activity costs and
activity bases are provided below.

Total "patient days" are determined by multiplying the number of
patients by the average length of stay in the hospital. A weighted
care unit (wcu) is a measure of nursing effort used to care for
patients. There were 160,000 weighted care units estimated for the
year. In addition, Healthmark estimated 5,000 patients and 22,500
patient days for the year. (The average patient is expected to have
a a little more than a four-day stay in the hospital.)

During a portion of the year, Healthmark collected patient
information for three selected procedures, as shown below.

Private insurance reimburses the hospital for these activities at a
fixed daily rate of $400 per patient day for all three
procedures.

1. Determine the activity rates.

Scheduling and admitting

$ per patient

Housekeeping

$ per patient day

Nursing

$ per wcu

2. Determine the activity cost for each procedure.

Procedure A

$

Procedure B

$

Procedure C

$

3. Determine the excess or deficiency of reimbursements to
activity cost.

3. Construct customer profitability reports for the three
customers, dated for the year ended December 31, 2013, using the
activity costs in (2). The reports should disclose the gross profit
and income from operations associated with each customer. Enter all
amounts as positive numbers.

Western
Mechanical Inc.

Customer
Profitability Report

For the Year
Ended December 31, 2013

Coastal
Atlantic University

Celebrity
Arena

Hope
Hospital

Revenues

$

$

$

Less cost of goods sold

Gross profit

$

$

$

Less selling and administrative
activities:

Customer service

$

$

$

Project bidding

Engineering support

$

$

$

Income (loss) from operations

$

$

$

4. Provide recommendations to management, based on the
profitability reports in (3).

Alabama Paper Company manufactures three products (computer paper,
newsprint, and specialty paper) in a continuous production process.
Senior management has asked the controller to conduct an
activity-based costing study. The controller identified the amount
of factory overhead required by the critical activities of the
organization as follows:

The
activity base associated with the two production departments is
direct labor hours. The indirect labor can be assigned to two
different activities as follows:

The activity-base usage quantities and units produced for the two
products are shown below.

1. Determine the factory overhead rates under the multiple
production department rate method. Assume that indirect labor is
associated with the production departments, so that the total
factory overhead is $175,000 and $205,000 for the Cutting and
Finishing departments, respectively.

Department

Production department rate

Cutting Department

$ per direct labor hour

Finishing Department

$ per direct labor hour

2. Determine the total and per-unit factory overhead costs
allocated to each product, using the multiple production department
overhead rates in (1).

Product

Total factory overhead

Factory overhead per unit

Snowboards:

$

$

Skis:

$

$

3. Determine the
activity rates, assuming that the indirect labor is associated
with activities rather than with the production departments.

Activity

Activity rate

Production Control

$ per prod. run

Materials Handling

$ per move

Cutting Department

$ per direct labor hour

Finishing Department

$ per direct labor hour

4. Determine the total and per-unit cost assigned to each
product under activity-based costing.

Renaissance Capital Group is considering allocating a limited
amount of capital investment funds among four proposals. The amount
of proposed investment, estimated income from operations, and net
cash flow for each proposal are as follows:

2. Giving effect to straight-line depreciation on
the investments and assuming no estimated residual value, compute
the average rate of return for each of the four proposals. If
required, round your answers to one decimal place.

Average Rate of Return

Proposal A:

%

Proposal B:

%

Proposal C:

%

Proposal D:

%

3. Using the following format, summarize the
results of your computations in parts (1) and (2) by placing the
calculated amounts in the first two columns and indicating which
proposals should be accepted for further analysis and which should
be rejected.

Proposal

Cash Payback Period

Average Rate of Return

Accept for Further Analysis

Reject

A

Select3 yrs., 4 mos.2 yrs.4 yrs.2 yrs., 8 mos.Item
9

%

SelectYesNoItem 11

SelectYesNoItem 12

B

Select3 yrs., 4 mos.2 yrs.4 yrs.2 yrs., 8 mos.Item
13

SelectYesNoItem 15

SelectYesNoItem 16

C

Select3 yrs., 4 mos.2 yrs.4 yrs.2 yrs., 8 mos.Item
17

SelectYesNoItem 19

SelectYesNoItem 20

D

Select3 yrs., 4 mos.2 yrs.4 yrs.2 yrs., 8 mos.Item
21

SelectYesNoItem 23

SelectYesNoItem 24

4. For the proposals accepted for further analysis
in part (3), compute the net present value. Use a rate of 15% and
the present value of $1 in table above. Round to the nearest
dollar.

Select the proposal accepted for further analysis.

SelectProposal AProposal BItem 25

SelectProposal CProposal DItem 26

Present value of net cash flow total:

$

$

Less amount to be invested:

$

$

Net present value:

$

$

5. Compute the present value index for each of the
proposals in part (4). If required, round your answers to two
decimal places.

Select proposal to compute Present value index.

SelectProposal AProposal BItem 33

SelectProposal CProposal DItem 34

Present value index (rounded):

6. Rank the proposals from most attractive to
least attractive, based on the present values of net cash flows
computed in part (4).

Rank 1st

SelectProposal AProposal BProposal CProposal DItem
37

Rank 2nd

SelectProposal AProposal BProposal CProposal DItem
38

7. Rank the proposals from most attractive to
least attractive, based on the present value indexes computed in
part (5).

Rank 1st

SelectProposal AProposal BProposal CProposal DItem
39

Rank 2nd

SelectProposal AProposal BProposal CProposal DItem
40

8. Based upon the analyses, comment on the
relative attractiveness of the proposals ranked in parts (6) and
(7).

On August 1, Matrix Stores Inc. is considering leasing a building
and purchasing the necessary equipment to operate a retail store.
Alternatively, the company could use the funds to invest in
$150,000 of 6% U.S. Treasury bonds that mature in 16 years. The
bonds could be purchased at face value. The following data have
been assembled:

1. Prepare a differential analysis as of August 1,
2012, presenting the proposed operation of the store for the 16
years (Alternative 1) as compared with investing in U.S. Treasury
bonds (Alternative 2). If an amount is zero, enter zero "0".

Differential
Analysis

Operate
Retail Store (Alt. 1) or Invest in Bonds (Alt.
2)

August 1,
2012

Operate
Retail Store (Alternative 1)

Invest in
Bonds (Alternative 2)

Differential
Effect on Income (Alternative 2)

Revenues

$

$

$

Costs

Costs to operate store

Cost of equipment less residual
value

Income (Loss)

$

$

$

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2. Based on the results disclosed by the
differential analysis, should the proposal to operate the retail
store be accepted?SelectYesNoCorrect 1 of Item 2

3. If the proposal is accepted, what would be the
total estimated income from operations of the store for the 16
years?
$

Franklin Printing Company is considering replacing a machine that
has been used in its factory for four years. Relevant data
associated with the operations of the old machine and the new
machine, neither of which has any estimated residual value, are as
follows:

Annual nonmanufacturing operating expenses and revenue are not
expected to be affected by purchase of the new machine.

1. Prepare a differential analysis as of February
29, 2012, comparing operations using the present equipment
(Alternative 1) with operations using the new equipment
(Alternative 2). The analysis should indicate the total
differential income that would result over the six-year period
if the new machine is acquired. If an amount is zero, enter zero
"0".

Differential
Analysis

Continue with
Old Machine (Alt. 1) or Replace Old Machine (Alt.
2)

February 29,
2012

Continue with
Old Machine (Alternative 1)

Replace Old
Machine (Alternative 2)

Differential
Effect on Income (Alternative 2)

Revenues

Proceeds from sale of old machine

$

$

$

Costs

Purchase price

Annual manufacturing costs (6
yrs.)

Income (Loss)

$

$

$

2. List other factors that should be considered
before a final decision is reached.

L'Essence Cosmetics Company is planning a one-month campaign for
June to promote sales of one of its two cosmetics products. A total
of $150,000 has been budgeted for advertising, contests, redeemable
coupons, and other promotional activities. The following data have
been assembled for their possible usefulness in deciding which of
the products to select for the campaign:

No increase in facilities would be necessary to produce and sell
the increased output. It is anticipated that 24,000 additional
units of moisturizer or 20,000 additional units of perfume could be
sold without changing the unit selling price of either product.

3. The sales manager had tentatively decided to
promote perfume, estimating that operating income would be
increased by $50,000 ($10 operating income per unit for 20,000
units, less promotion expenses of $150,000). The manager also
believed that the selection of moisturizer would reduce operating
income, ($6,000) ($6 operating income per unit for 24,000 units,
less promotion expenses of $150,000). State briefly your reasons
for supporting or opposing the tentative decision.

b. Material requisitioned for use in Department
1, $125,700, of which $124,200 entered directly into the product.
For a compound transaction, if an amount box does not require an
entry, leave it blank or enter "0".

c. Labor cost incurred in Department 1,
$195,400, of which $174,000 was used directly in the manufacture of
the product. For a compound transaction, if an amount box does not
require an entry, leave it blank or enter "0".

b. Material requisitioned for use in Department
1, $125,700, of which $124,200 entered directly into the product.
For a compound transaction, if an amount box does not require an
entry, leave it blank or enter "0".

c. Labor cost incurred in Department 1,
$195,400, of which $174,000 was used directly in the manufacture of
the product. For a compound transaction, if an amount box does not
require an entry, leave it blank or enter "0".

The controller of Dash Shoes Inc. instructs you to prepare a
monthly cash budget for the next three months. You are presented
with the following budgetinformation:

March

April

May

Sales

$118,000

$142,000

$188,000

Manufacturing costs

50,000

61,000

68,000

Selling and administrative expenses

34,000

38,000

41,000

Capital expenditures

_

_

45,000

The company expects to sell about 15% of its merchandise for
cash. Of sales on account, 70% are expected to be collected in full
in the month following the sale and the remainder the following
month. Depreciation, insurance, and property tax expense represent
$9,000 of the estimated monthly manufacturing costs. The annual
insurance premium is paid in July, and the annual property taxes
are paid in November. Of the remainder of the manufacturing costs,
85% are expected to be paid in the month in which they are incurred
and the balance in the following month.

Current assets as of March 1 include cash of $45,000, marketable
securities of $64,000, and accounts receivable of $131,200
($103,000 from February sales and $28,200 from January sales).
Sales on account for January and February were $94,000 and
$103,000, respectively. Current liabilities as of March 1 include a
$59,000, 12%, 90-day note payable due May 20 and $9,000 of accounts
payable incurred in February for manufacturing costs. All selling
and administrative expenses are paid in cash in the period they are
incurred. It is expected that $3,500 in dividends will be received
in March. An estimated income tax payment of $17,000 will be made
in April. Dash Shoes' regular quarterly dividend of $9,000 is
expected to be declared in April and paid in May. Management
desires to maintain a minimum cash balance of $35,000.

1. Prepare a monthly cash budget and supporting
schedules for March, April, and May. Input all amounts as positive
values except overall cash decrease and deficiency which should be
indicated with a minus sign. Assume 360 days per year for interest
calculations.

The budget director of Feathered Friends Inc., with the
assistance of the controller, treasurer, production manager, and
sales manager, has gathered the following data for use in
developing the budgeted income statement for October 2012:

Estimated sales for October:

Estimated inventories at October 1:

Desired inventories at October 31:

Direct materials used in production:

Anticipated cost of purchases and beginning and ending
inventory of direct materials:

The company expects to sell about 15% of its merchandise for
cash. Of sales on account, 70% are expected to be collected in full
in the month following the sale and the remainder the following
month. Depreciation, insurance, and property tax expense represent
$9,000 of the estimated monthly manufacturing costs. The annual
insurance premium is paid in July, and the annual property taxes
are paid in November. Of the remainder of the manufacturing costs,
85% are expected to be paid in the month in which they are incurred
and the balance in the following month.

Current assets as of March 1 include cash of $45,000, marketable
securities of $64,000, and accounts receivable of $131,200
($103,000 from February sales and $28,200 from January sales).
Sales on account for January and February were $94,000 and
$103,000, respectively. Current liabilities as of March 1 include a
$59,000, 12%, 90-day note payable due May 20 and $9,000 of accounts
payable incurred in February for manufacturing costs. All selling
and administrative expenses are paid in cash in the period they are
incurred. It is expected that $3,500 in dividends will be received
in March. An estimated income tax payment of $17,000 will be made
in April. Dash Shoes' regular quarterly dividend of $9,000 is
expected to be declared in April and paid in May. Management
desires to maintain a minimum cash balance of $35,000.

1. Prepare a monthly cash budget and supporting
schedules for March, April, and May. Input all amounts as positive
values except overall cash decrease and deficiency which should be
indicated with a minus sign. Assume 360 days per year for interest
calculations.

The company expects to sell about 15% of its merchandise for
cash. Of sales on account, 70% are expected to be collected in full
in the month following the sale and the remainder the following
month. Depreciation, insurance, and property tax expense represent
$9,000 of the estimated monthly manufacturing costs. The annual
insurance premium is paid in July, and the annual property taxes
are paid in November. Of the remainder of the manufacturing costs,
85% are expected to be paid in the month in which they are incurred
and the balance in the following month.

Current assets as of March 1 include cash of $45,000, marketable
securities of $64,000, and accounts receivable of $131,200
($103,000 from February sales and $28,200 from January sales).
Sales on account for January and February were $94,000 and
$103,000, respectively. Current liabilities as of March 1 include a
$59,000, 12%, 90-day note payable due May 20 and $9,000 of accounts
payable incurred in February for manufacturing costs. All selling
and administrative expenses are paid in cash in the period they are
incurred. It is expected that $3,500 in dividends will be received
in March. An estimated income tax payment of $17,000 will be made
in April. Dash Shoes' regular quarterly dividend of $9,000 is
expected to be declared in April and paid in May. Management
desires to maintain a minimum cash balance of $35,000.

1. Prepare a monthly cash budget and supporting
schedules for March, April, and May. Input all amounts as positive
values except overall cash decrease and deficiency which should be
indicated with a minus sign. Assume 360 days per year for interest
calculations.

The company expects to sell about 15% of its merchandise for
cash. Of sales on account, 70% are expected to be collected in full
in the month following the sale and the remainder the following
month. Depreciation, insurance, and property tax expense represent
$9,000 of the estimated monthly manufacturing costs. The annual
insurance premium is paid in July, and the annual property taxes
are paid in November. Of the remainder of the manufacturing costs,
85% are expected to be paid in the month in which they are incurred
and the balance in the following month.

Current assets as of March 1 include cash of $45,000, marketable
securities of $64,000, and accounts receivable of $131,200
($103,000 from February sales and $28,200 from January sales).
Sales on account for January and February were $94,000 and
$103,000, respectively. Current liabilities as of March 1 include a
$59,000, 12%, 90-day note payable due May 20 and $9,000 of accounts
payable incurred in February for manufacturing costs. All selling
and administrative expenses are paid in cash in the period they are
incurred. It is expected that $3,500 in dividends will be received
in March. An estimated income tax payment of $17,000 will be made
in April. Dash Shoes' regular quarterly dividend of $9,000 is
expected to be declared in April and paid in May. Management
desires to maintain a minimum cash balance of $35,000.

1. Prepare a monthly cash budget and supporting
schedules for March, April, and May. Input all amounts as positive
values except overall cash decrease and deficiency which should be
indicated with a minus sign. Assume 360 days per year for interest
calculations.

For the year, Optic Matrix Inc. budgeted the following costs for
the Yokohama production cell:

Optic Matrix Inc. plans 3,200 hours of production for the Yokohama
cell for the year. The materials cost is $125 per instrument
assembly. Each assembly requires 24 minutes of cell assembly time.
There was no November 1 inventory for either
Raw and In Process Inventory or Finished Goods Inventory.

The following summary events took place in the Yokohama cell during
November:

Electronic parts and wiring were purchased to produce 8,200
instrument assemblies in November.

Conversion costs were applied for the production of 8,000 units in
November.

7,850 units were started, completed, and transferred to finished
goods in November.